Home Loan Defaults Skyrocketing in San Diego County

From today's The Union-Tribune comes an article titled Home loan defaults skyrocket in county. The number of actual foreclosures in February 2007 is the highest since 1996, although San Diego county's default rate is not among the highest in the state. Out of California's 58 counties, San Diego county ranks 17th among the states, with San Joaquin county holding the dubious rank of #1.

The DataQuick figures, assembled by ZIP code, show high concentrations of distressed properties in newly built South County communities such as Otay Ranch and among condo conversion complexes countywide. In both cases, buyers stretched their finances to purchase a home and then saw values fall, making it impossible for them refinance into more affordable loans.

The area with the highest local default rate this year was San Ysidro ZIP code 92173, with a rate of 10.79 per 1,000 homes. Default activity for January and February ranked San Ysidro 15th among 1,100 ZIP codes statewide having 1,000 or more homes.

This chart shows the number of default notices and foreclosures over the past 12 years or so.

The Widening Income Gap

Anytime I read a statistic that says, "Metric X hasn't been this (largesmallhighlowetc.) since the years before the Great Depression," I start worrying. For example, the average savings rate - which is negative, by the way - is at its lowest levels since the Great Depression. Similarly, a new study reports that the incomes of the top 1% and of the top 10% of Americans are receiving their largest shares of the GDP since 1928.

From The New York Times's article Income Gap Is Widening, Data Shows:

Income inequality grew significantly in 2005, with the top 1 percent of Americans — those with incomes that year of more than $348,000 — receiving their largest share of national income since 1928, analysis of newly released tax data shows. The top 10 percent, roughly those earning more than $100,000, also reached a level of income share not seen since before the Depression.

...

The gains went largely to the top 1 percent, whose incomes rose to an average of more than $1.1 million each, an increase of more than $139,000, or about 14 percent.
The new data also shows that the top 300,000 Americans collectively enjoyed almost as much income as the bottom 150 million Americans. Per person, the top group received 440 times as much as the average person in the bottom half earned, nearly doubling the gap from 1980.

Now, I am a capitalist and am not pro-wealth distribution, but I do think that a society has trouble functioning justly (and efficiently) if income distribution is too skewed. Part of the reason capitalism works is because those in lower socioeconomic positions honestly believe that they can better their position through hard work, industry, and ingenuity. But if the wealth gap grows too big, I worry that those on the lower and middle rungs will adopt a, "Screw it" mentality, figuring either that their are stuck in their position in life (and, then, why bust your butt?) or that the only way to success is through fame, the lottery, or some other flash in the pan that is based primarily on luck and does not encourage the aforementioned qualities.

Let me close with a completely unrelated comment: I have recently discovered - and highly recommend - Calculated Risk, which is an interesting and well-written blog from mortgage industry insiders. Of particular interest are entries dissecting the math and economics behind common mortgage concepts, like PMI, Neg-Am Loans, and mortgage servicing.

Subprime Mortgage Market in Flames

Have I got a good deal for you - a home mortgage loan fixed at 1%! Yes, that's right, fixed at 1%. And the best part is, you can pay what you want each month. Want to put more down one month? Go ahead! Want to pay less? That's OK, too. Remember, just because you're not paying down the principle, doesn't mean the house is not increasing in value!

Sound familiar? This is the sort of filth that's been spewing out of the subprime mortgage industry for the past several years. It's particularly bad on AM radio.

There are only so many loans that can be written for "credit challenged" individuals buying obscenely overpriced real estate with little to nothing down before the house of cards collapses. We're starting to see that collapse in the subprime market. BusinessWeek has a good article published recently titled, Why Subprime Lenders Are In Trouble, which comes on the heels of many mortgage companies reporting troubles within their subprime departments.

The reasons for the subprime mortgage market's troubles are not surprising. As the housing boom grew in the first third of the decade, mortgage business grew apace. But as rates started climbing, sales started declining, and prices grew stagnant, the margins thinned and the growth during the boom times became overgrowth dragging down the bottom line. Also, these companies ditched traditional risk evaluations. Why not dole out a NINA 100% LTV loan to a credit risk? After all, it's about keeping volume up and closing deals, we'll worry about whether the application's stated income really is legit later. Such head in the sand mentality works when the market is booming, but quickly crumbles once the boom turns into bust.

The big question is how much of this malaise will seep into the prime mortgage market. Being an RE bear, I would be surprised if the prime market isn't hit hard. Too many loans were given out to buy "investment" properties, with little to no down and little to no income or asset verification. The rest of this decade will be an interesting one for the RE market. How far will prices slip? How long before there's any kind of sustainable rebound in sales or price? How will counties and cities deal with budgets that fall short because of the decline in property and RE-related taxes? How many construction workers, mortgage brokers, and RE agents will be looking for new jobs? Interesting times!